Do you have a Requirement to Correct?

12 June 2018

Requirement to Correct (RTC) legislation was introduced during the Finance Act 2017, to tackle offshore non-compliance. In simple terms it requires UK taxpayers to ensure that all foreign income and assets, where there may be UK tax to pay, have been correctly declared to HMRC by 30 September 2018.

The deadline corresponds with the date from which HMRC and over 100 other countries start to exchange financial information. This will give HMRC enhanced access to data about offshore income and assets, enabling them to identify and address non-compliance.

Those who fail to correct offshore discrepancies by 30 September 2018 risk higher penalties. The standard penalty will be 200% of the tax involved. Factors such as cooperating with HMRC or disclosing voluntarily will be taken into account, but the standard penalty cannot be reduced to less than 100% of the tax involved. An additional penalty of 10% of the value of assets can be imposed, on top of the standard penalty, if the tax involved exceeds £25,000 in any year. Cases where assets have been moved offshore to avoid reporting are subject to further enhanced penalties; serious cases may see taxpayers ‘named and shamed’.

It should be noted that RTC is wide reaching and applies whether the non-compliance is due to deliberate motives or carelessness. It could therefore catch a mistake on a previously submitted Tax Return, which has resulted in offshore income or gains being understated and an underpayment of tax. As such it is important that anyone who may potentially be impacted considers their tax position carefully.

A broad outline of RTC follows below, but this is not an exhaustive summary of the provisions. Those who are in any doubt should seek guidance on their particular circumstances.

Who and what does RTC apply to?

Individuals, trustees, partnerships (and some companies) who have undisclosed Income Tax, Capital Gains Tax and Inheritance Tax liabilities, relating to offshore matters or transfers. It affects UK taxpayers, so may also be relevant to those living abroad (e.g. with UK source income such as let property).

Offshore income and gains (e.g. a holiday home abroad that was previously let and sold but not reported to HMRC), and offshore transfers (e.g. UK source income or gains not previously declared to HMRC which have been transferred to an overseas bank account).

There must have been a compliance failure or inaccuracy within a Return such as:

Not telling HMRC about a tax liability relating to offshore income / gains

Not submitting a Tax Return on time where there are offshore income / gains to report

An error in a previously submitted Tax Return which has resulted in a tax underpayment or increased tax refund

The failure or inaccuracy must have taken place before 6 April 2017, and HMRC must be within time to raise an assessment to recover the unpaid tax on 6 April 2017. This will depend on the type of failure or inaccuracy but generally HMRC can look back four, six or 20 years for non-careless, careless and deliberate actions respectively.

Time to take stock

Whether intentional or not, the provisions of RTC are broad in scope and unfortunately do not differentiate between a genuine error and more deliberate actions. Those required to take action under RTC must also consider their tax affairs as a whole, and address any other (e.g. onshore) irregularities as part of their disclosure.